The Dollar Comes Back Bid

Overview: It has taken some time, but the dollar has found better traction. It traded above JPY135 for the first time since mid-March and yesterday's setback has been mostly recouped against the other G10 currencies. Sterling is the most resilient after higher-than-expected inflation. Equities are lower. Japan's Nikkei snapped an eight-day advance and most of the other large bourses in the region (except Australia and South Korea) fell. Europe's Stoxx 600 is off by almost 0.5%, which is sustained would be the largest loss since March 24. US equity futures are also under pressures. If this is risk-off, the bond market does not know it. Yields are up mostly 3-5 bp, while that higher inflation has lifted the 10-year Gilt yield nine basis points. The US 10-year Treasury yield is up nearly five basis points to about 3.62%, a new high for April. 

Higher yields and a stronger dollar have sent gold sharply lower. It peaked at the end of last week ahead of $2050 and traded down to around $1972 today. That is the lowest level since April 3. It has broken below the 20-day moving average (~$1992.50) but has not closed below it since March 9. Oil is also under pressures. June WTI approached its lowest level since OPEC+ announced cuts on April 2. A break of $79.00, the top of the gap, could see an effort to close it. The bottom of the gap is near $73.90. Lastly, we note that natgas is snapping a three-day and nearly 19% rally.

Asia Pacific

It happened last year too. Japan's industrial output fell sharply in January and bounced back smartly in February. In January 2022, Japan's industrial production slumped by 2.4% and then jumped 2% in February. This year, industrial output collapsed by 5.3% in January and today's report confirmed it rose 4.6% in February (4.5% initially). In a Bloomberg survey (April 11-14), the median forecast sees the world's third-largest economy expanding by 1.3% in Q1 (seasonally adjusted annual rate) and 1.4% in Q2. Both are slightly higher than in the previous survey.

Tomorrow, Japan reports March's trade balance. The deficit is expected to widen sharply. Recall that in January, Japan posted a record trade deficit of JPY3.5 trillion (~$26 bln). It fell back to JPY898 bln, improving as it always does in February. The median forecast is for a nearly 1.3 trillion deficit in March. In March 2022, the deficit was almost JPY465 bln. The rolling 12-month shortfall stood at JPY1.79 trillion in February. The last time it was in surplus was October 2021. The Ministry of Finance will report weekly portfolio flows tomorrow as well. Recall that in the week ending April 7, foreign investors bought JPY2.37 trillion of Japanese bond and JPY1.3 trillion of Japanese equities. For their part, Japanese investors sold foreign bonds for the second consecutive week. And over those two weeks, they sold a little more than they bought in the last week of March (JPY1.27 trillion vs. JPY1.18 trillion). Japanese investors bought a relatively modest amount of foreign equities over the past two week through April 7 (JPY418 bln), the most in a two-week period since January.

The dollar traded above JPY135.00 for the first time since March 15. Stops lifted it to almost JPY135.15. The intraday momentum indicators are stretched, and it quickly retreated reversed lower, as if some participants were waiting for this as an opportunity to sell dollars. Initial support is seen near JPY134.40. The Australian dollar stalled near $0.6750 yesterday, near a retracement target and the 200-day moving average. It has come back offered and is approaching support near $0.6700. A break of $0.6680 retargets the $0.6600 area. The greenback poked above CNY6.90 for the first time since late March. Broad US dollar strength seems to be the driver. The 200-day moving average is near CNY6.9265 and the dollar has not traded above it since mid-March. The PBOC set the dollar's reference rate at CNY6.8731, as tight to projections as possible (CNY6.8732). 

Europe

UK price pressure last month was stronger than expected. The UK's March CPI rose by 0.8% after February's surge of 1.1%. The median forecast was for a 0.5% increase. The year-over-year rate slowed to 10.1% from 10.4%, defying expectations for its first single-digit print since last August. The base effect works in the UK's favor in March and in April. In March 2022, UK CPI rose by 1.1% and in April it jumped 2.5%. As these drop out of the 12-month comparison, the year-over-year rate will decline. The core rate was unchanged at to 6.2% after jumping from 5.8% in January. In March 2022, the core rate was at 5.7%. It peaked at 6.5% last September and October. Meanwhile producer prices edged higher though they had been expected to ease on the month. However, due to the base effect, the year-over-year rates slowed, even if not as much as expected. The net impact is that the swaps market has moved to nearly price in a 5% terminal rate, implying 75 bp more to go.

There had been some hope that the US Inflation Reduction Act would allow some automakers from Europe and Asia to qualify for the tax breaks for electric vehicles. However, the latest data, using the stricter battery source rules, means that 10 EVs and plug-in hybrids qualify for the full $7500 tax break, according to reports. This is roughly half the number that qualified under the more lenient rules that were in effect in the first part of the year. GM, Tesla, and Ford all have at least one EV that qualifies. Ford and Stellantis each have one plug-in hybrid that qualifies. Seven additional models, form Tesla, Ford, and Stellantis qualify for half of the tax break. The new rules went into force yesterday. Several vehicles (including models from Volkswagen, Hyundai, Nissan, Rivian, Volvo, and BMW) which were eligible earlier this year for at least a partial tax credit no longer qualify. Others EV, (including Ford's Mustang Mach-E and Tesla's Standard Range Model 3 sedan) will see their tax credit halved to $3750. 

The euro stalled near $1.0985 and has approaching yesterday's lows slightly above $1.0920. Monday's low was closer to $1.0910 and the 20-day moving average is near $1.09. A break of the $1.0890 area could signal a move toward $1.0860, and possibly $1.08. The rates story is helping sterling. It initially rallied to almost $1.2475, a new high for the week, before being knocked back toward $1.2400. A break of the $1.2345 area would undermine the technical outlook and signal a potential double top that could project to the $1.2150-75 area.

America

The Fed funds futures market continued to pare rate cut expectations. As recently as April 5, the implied yield for the end of Q3 was about 4.30%, implying almost 100 bp reduction from the 5.25% that is expected on May 3, with a 25 bp hike. Now, the implied yield for the end of Q3 is around 4.97%. The year-end rate is seen at 4.65%. It was near 3.88% on April 5. Although these yields are their highest since March 13, they still imply cuts, while the market has largely unwound rate cut expectations elsewhere, including Canada. The swaps market implied a year-end Canadian target rate of slightly below 3.60% on March 23, amid the banking stress. It has recovered and is now near 4.41%, fractionally above the current target of 4.50%, implying little more than a 1-in-3 chance of a cut.

The US has a light economic diary today. Mortgage applications for last week will be reported. They have risen in five of the past six weeks. They fell for four of the previous five weeks. March existing house sales will be reported tomorrow. Recall that they rose in February for the first time since January 2022. They did not just "rise" in February but surged 14.5%. Most economists look for a pullback in March. Later in the session, the Beige Book for next month's FOMC meeting will be released. It tends not to move the markets. Still, the focus will be in labor market readings and price pressures. After the markets close tomorrow Chicago Fed President (and voting member of the FOMC this year) Goolsbee will be interview on NPR's Marketplace. Although he has urged caution about hiking rates next month, the futures market has about an 85% chance of a quarter-point hike discounted, higher than before he spoke. Some see him as a likely dissent. And as the Asia-Pacific session gets underway, NY Fed President Williams will give a dinner speech at the NY Money Marketeers. As the vice-chair of the FOMC, and a permanent voter, Williams hues closely to the Fed's leadership's views. 

The US dollar extending its gains against the Canadian dollar and has entered a band of resistance in the CAD1.3430-60 area. There are about $570 mln options struck at CAD1.3455 that expire today. A push above there targets CAD1.3500-20. A strike by 155k federal workers may add to the weaker sentiment. Initial support is seen around CAD1.3400-20. The greenback is also firm against the Mexican peso. It is testing this week's high near MXN18.1540. The 20-day moving average is near MXN18.17, and the dollar has not traded above it since March 27. A move above MXN18.22 could signal a return to this month's high around MXN18.40.

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